Markets: Ports and Politics
New York: March 13, 2006
By John R. Stephenson

Chock one up for politics. This week the U.S. House Appropriation Committee blocked the Dubai Ports World deal. A transaction, that if successful, would have seen a company based in the United Arab Emirates buying a British company (Peninsular & Oriental) that currently offers port management services to six of the nation's ports. What was the hullabaloo about? That control over the operations at these ports would fall into the hands of a company (Dubai Ports World) that is owned by the government of the United Arab Emirates. With control over some of the largest commercial ports in the U.S. falling into Arab hands, a political firestorm over national security was the upshot.

This debate over national security was a red herring because security over the nation's ports in the responsibility of the Coast Guard and U.S. Customs. Security is not the responsibility of the port operations firms.

But to democrats, this was an opportunity to jump on the national security bandwagon. The Dubai Ports World ("DPW") deal offered Democrats a chance to show that they were the party leading the charge on the issue of national security. As Democratic Party Chairman Howard Dean put it "This is not about the idea of an Arab country controlling American port operations. President Bush and the Republicans who control Congress should not outsource the safety of American ports to any foreign country. Democrats believe that America's security is America's business."

This dust-up was about perception, rather than reality. DPW is a firm that moves freight. Plain and simple. And what about all those other foreigners who control ports in America — are we going after them next? Perhaps. Foreign firms run many of our ports. Singapore runs terminals in Oakland, the Chinese in Los Angeles and the Danish run five U.S. ports. So what to do?

The real issue here was this was an Arab-based firm. Never mind that the U.A.E. is a friendly Arab country and a voice of moderation in the Arab world. Our navy calls at the port of Dubai and we use their airfields to launch our attacks on Iraq and Afghanistan. These are our friends. But why let the facts get in the way of a good argument.

After the House Appropriations Committee voted 62-2 to block the deal, Dubai Ports World backed down. On March 9 th, they agreed to transfer control of these six ports to a U.S.-based entity.

While politicians hailed this as a great victory for national security, it was, in fact, a huge defeat for the global economic system. One that follows on the heels of Congress's move late last year to block the takeover of Unocal (an oil company) by China. While this might be smart politics, it is stupid economics.

The economic problem here is one of protectionism. For years, the U.S. has encouraged other nations to open up their economies to foreign trade and investment. As a nation, we have invested some $10 trillion abroad, on which we earn profits of approximately $500 billion a year.

Not only that, but as a nation with a negative personal savings rate, we are increasingly at the mercy of foreign investors who have so far lapped up our treasury bonds — allowing us to continue with our consuming ways.

According to the Organization for International Investments, some 5.3 million Americans are employed directly by foreign owned firms. Making, on average, some 50 percent more than the average American. So if foreigners are making a U.S. economic expansion possible by buying our over-priced treasury bonds and employing our people, then what exactly is the problem?

Politics. Politicians get a lot of votes for wrapping themselves in the flag and saying that they are protecting American jobs . Never mind that in a world that is increasingly intertwined, it is imperative that foreigners continue to invest in our country. In fact, one reason why, in spite of our massive personal and governmental debts, we have been able to continue to attract foreign investment is that we are viewed as having a stable, well-functioning and open political system.

But with this blatantly political move, Congress has affirmed to the world that the U.S. is not open for business. When protectionism wins and free trade loses, the people who come up short are the investors. People who are willing to invest today, for a return tomorrow. If Congress continues to stick its nose in every transaction involving foreign corporations, then the wheels of commerce will start to turn a little slower. Investment from abroad will start to dry up. The dollar could fall. The U.S. economy could slip into a recession.

Foreign companies are an easy target — they don't vote in U.S. elections. With problems festering on the home front, blaming those nasty foreigners is a pretty convenient dodge to the real culprits — too little domestic savings and investment. According to the Wall Street Journal, recent musing out of the halls of congress have suggested that "the foreign ownership ban should apply to roads, telecommunications, airlines, broadcasting, shipping, technology firms, water facilities, buildings, real estate and even U.S. Treasury securities." Just about everything. Things seem to be getting worse, rather than better.

The U.S. has grown rich and powerful in the last century because it was a place where people wanted to live and invest. A place where, if you played by the rules, built a better mousetrap, you could prosper. But protectionism, serves to turn back the clock and shut off the rest of the world, particularly at a time when we desperately need the rest of the world to buy American. Americans are just too tapped out to do much more buying.

Yet, for Congress, politics is politics and votes are votes. What sells now is that Americans are afraid. Afraid for their security, both physically and financially. It doesn't matter to politicians whether the issue is real or imagined. What matters is being perceived to be doing something positive no mater what the end game and no matter what troubling signals such a move might send to investors and partners around the globe. By saying "no" to the Dubai Ports World deal, politicians can look like heroes—at least for a while.

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